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Scrapping pension tax relief will stem investment

Abolishing the higher rate of pension tax relief in next week’s budget will limit future investment, believes a private client expert. Stephen Lewin, partner at Bircham Dyson Bell, says that it would be a mistake for Chancellor of the Exchequer George Osborne to scrap the relief in next week’s budget.

14 March 2012

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“It is possible that the higher rate of pension tax relief will be abolished. This issue has been a political football, with Gordon Brown reducing the maximum limit from £225,000 to £20,000 and then George Osborne increasing it to £50,000 with a carry-forward facility, although this has all been at highest rate.

“Scrapping the higher rate relief would cause major ripples in the pension market and we would see a rapid decline in people making pension contributions. Pension investment performance has not been very exciting over the last ten years and it has been largely down to this tax relief that people have made any sort of contribution at all; basic rate tax relief will not hold the same allure.”

Lewin also believes that speculation on lowering the higer rate tax rate might be overblown. “Despite the pressure from the business community, my gut feeling regarding the 50 per cent income tax rate is that nothing much will happen at all. It wouldn’t surprise me if the Chancellor reduced the rate to 45 per cent in an attempt to show willing, although in reality this would make little difference. Osborne may instead look to alter the £150,000 threshold, or we might go back to a system with more rates. It seems the government is waiting for the Office of Budget Responsibility to make its pronouncement as to how much is generated by the 50 per cent rate before taking action.”

Private wealth partner at Bircham Dyson Bell James Johnston believes that the mooted mansion tax represents a big investment for little gain. “The problem with a mansion tax is that it could never be a quick-fix solution and the question on everybody’s lips is what a mansion tax might look like.

“What are the possibilities? At face value, introducing an upper band of council tax seems a simple option, as there is a mechanism for tax collection already. There are two issues with this, however. First, the money collected would go to the local authorities and not to the government directly. Second, it is likely that a complete revaluation of all the council tax bands would be required and this would be a vastly expensive thing for a government to do – they would have to put in a lot of cost and resource before they got anything back, which makes it an unattractive option,” says Johnston.

“Instead of a mansion tax it is conceivable that we might see the introduction of a continental-style wealth tax, similar to that of Spain, Switzerland and France where an individual must pay a percentage of tax on their general wealth above a certain threshold. However, it seems more likely that efforts will be focused on clamping down on the avoidance of stamp duty land tax and capital gains tax by foreign owners of UK property than going down this particular route,” he says.

Johnston also envisages problems with a general anti-avoidance rule (GAAR). “In the field of tax planning there are always a minority who promote aggressive schemes. One way of discouraging this would be to introduce a general anti-avoidance rule (GAAR). However, to my mind a GAAR would create more issues than it resolves,” he says.

“A broadly worded anti-avoidance provision would make it difficult for professionals to advise their clients on the effect of entering into any transaction. For genuine commercial transactions, a client needs to know whether or not they will fall within the rule. There therefore needs to be a proper clearance procedure, but the government has indicated that it would be too expensive to implement a separate procedure for the GAAR - if such a rule were implemented without a clearance procedure I would anticipate major problems.

“Furthermore, one would have thought that the compulsory tax disclosure procedures have gone quite a long way to address the issue of aggressive tax avoidance schemes already. The Revenue has been very successful in gathering information about tax schemes and one would question whether a GAAR procedure is required on top of this.”

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Tax & Wealth structuring Pensions